What are the costs of bitcoin mining?

Arcane Research has published a report very interesting on the costs of mining bitcoins.

What are the main costs of bitcoin mining?

BTC mining is a very competitive industry, constantly disrupted by the rapid gains in energy efficiency of semiconductors.

The most efficient mining machines are the S19XP antminers, equipped with 5nm chips. Samsung also produces 3nm chips. The Korean even plans to release 2nm chips by 2025, and 1.4nm by 2027.

For comparison, 5nm chips consume 75% less energy than 10nm chips. In other words, the 5nm chip consumes four times less energy. 3nm chips consume for their part 30 % less energy than those in 5nm.

The two obvious ways for a miner to gain a competitive advantage is therefore to have the most efficient machines and the cheapest electricity.

The “law of the last survivor” means that only miners with the lowest production costs survive long bear markets. Not buying your machines on credit is also a big advantage.

Nevertheless, Arcane realized while going through the accounts of American miners that administrative costs can also make a big difference.

What are administrative costs?

Arcane defines them as expenses that are not related to production. Typically, executive salaries.

Administrative costs are one of the two major operating costs in the mining industry. The second are production costs such as energy and on-site staff salaries.

Most publicly traded BTC miners have managed to minimize their production costs. Their margins are also excellent. They oscillate between 63 and 80%:

public mining: bitcoin production margin since 2021
Margin earned on bitcoin production since 2021 by major US miners

This margin must be sufficient to finance the depreciation of mining machines that are aging or rendered obsolete by the arrival on the market of more efficient models.

This margin is also used to pay administrative costs and dividends to shareholders. For Arcane, “As amortization can hardly be avoided, it is by minimizing administrative costs that we can increase profits”.

Some miners are very greedy…

The following graph shows the share of revenue that publicly traded US miners spend on administrative costs:

Public mining: share of revenue spent on administration since 2021
Share of revenue spent on administrative costs since 2021

Miners spend an average of 50% of their income on administrative costs. Marathon has spent the equivalent of 97% of its revenue on administrative costs since 2021.

We say “equivalent” because a good part of these costs are payments in the form of shares to the directors. These share issues dilute the shareholders, but do not impact the number of BTC held by Marathon (more than 10,630 BTC).

Arcane points out, however, that these administrative costs contrast with those of other industries. “For example, the average in the oil industry is 2%. And 3% in the gold mining industry”can we read in the report.

In short, it is good to work in the bitcoin mining industry… According to VanEck, the middle manager earns five times more than his counterpart in the IT sector.

Arcane Conclusion: “Administrative expenses have absorbed a considerable part of the income, mainly to enrich the managers at the expense of the shareholders ». So that “most listed miners have never made a profit, even in the boom year of 2021.”

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